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In August 2011, the Government of Bulgaria and the World Bank completed the negotiations of two loans in support of Bulgarian railway reform, namely the Specific Investment Loan to NRIC of EUR 70 million to modernize the maintenance of railway infrastructure, and the first of a series of three Development Policy Loans over the period between 2011 and 2013 of EUR 80 million each. Once all needed documentation is submitted by the Government, the two loans will be presented to the World Bank's Board of Executive Directors for approval.

2. Are Bulgarian railways in trouble?

Revenues of Bulgarian State Railways (BDZ EAD) suffered a severe decline in 2008, 2009, and 2010. BDZ EAD was unable to adequately finance its operations in 2009 and 2010 and to service its debt. BDZ EAD’s financial difficulties and the drop in traffic also had negative impacts on the financial situation of the National Railway Infrastructure Company (NRIC).

3. Why are Bulgarian railways in trouble?

The transport market in Bulgaria has changed dramatically in the past 20 years, but the railway companies have not adjusted their business and structures to current market needs.

BDZ EAD and NRIC have become one of the least productive railways in the European Union, they are overstaffed, they have obsolete rolling stock, railway infrastructure is generally in poor condition, and the significant subsidies that are given to both companies are not always efficiently used.

Freight transport by rail in Bulgaria also dropped dramatically due to the global financial crisis (by about 40 percent), and its impact on BDZ EAD and NRIC was even deeper due to the existing poor status and condition of BDZ EAD and NRIC.

4. What can be done about it?

The Government has prepared a plan in 2010 to rescue BDZ EAD in accordance with EU legislation on state aid, and to restructure NRIC. The rescue plan includes measures to reorganize BDZ EAD and NRIC; reduce their costs; restructure their staff, assets, and debt; and carry out necessary investments.

Without implementing the Government’s reform program, the much needed investments that are supported by EU funds would be wasted.

5. Why should the government rescue railways in Bulgaria?

The collapse of Bulgarian State Railways (BDZ EAD), which currently provide all railway passenger transport in Bulgaria and 80 percent of goods transport by rail, would have negative consequences for:

The 80,000 passengers and 30,000 tons that are transported by BDZ EAD on average every day.

BDZ EAD’s labor force of about 14,000.

The National Railway Infrastructure Company (NRIC) – the railway infrastructure manager and its staff of 15,000.

Logistics and freight forwarding businesses that use railways in Bulgaria.

6. How do I know my tax money will not be wasted?

Transfers from state budget to railways in the last 5 years are going up both in value and in relative terms to GDP. About BGN 400 million is given to railways from the state budget in 2009. That is about BGN 55 on average per year for every Bulgarian citizen.

Because the rescue of railways by the Government would be financed by Bulgarian taxpayers’ money or by debt for future generations of Bulgarians, the rescue should be implemented only if it ensures that railways will be put back on a sound financial footing and that taxpayers will not be called upon again in the near future for another rescue due to poor management or poor policy decisions.

7. If BDZ EAD is in crisis, why is the Government also reforming NRIC?

NRIC has one of the lowest productivity indicators in the European Union. For example, while NRIC manages 4,150 km of lines with 15,000 staff, the infrastructure manager in Spain manages 14,000 km with 14,000 staff.

Low productivity makes NRIC’s cost very high, and this translates into higher tariffs for railway operators and higher transfers from the budget (taxpayers’ money) to NRIC each year. The rescue of BDZ EAD and the long term survival of all other railway operators in Bulgaria greatly depend on lowering NRIC’s costs.

Without reforming NRIC, the whole survival of the railway industry in Bulgaria may be in jeopardy, unless the Government significantly increases its budgetary transfers to NRIC, which is not a desirable option because there are other needs in other sectors of the Bulgarian economy.

8. How can the World Bank help?

The Government of Bulgaria developed a Railway Reform Program to:

- Rescue the railway sector and to put railways in Bulgaria on a solid foundation to support Bulgaria’s economic development in the years ahead.

- Make the full and efficient use of EU Cohesion funds available to railways under the Operational Program for Transport.

- Meet the strict requirements of the EU’s regulations regarding the granting of state aid to enterprises in financial difficulties, in this case BDZ EAD.

The Government of Bulgaria requested World Bank technical support to implement the Railway Reform Program.

The World Bank is therefore involved in the railway sector at this critical stage less in its capacity as financier and more in its capacity as advisor. The World Bank has been involved in railway sector reforms all over the word in the past decades—including in Bulgaria—and significant experience has been gained, which provides valuable lessons, some of which can be helpful under the current circumstances of Bulgarian railways.

World Bank’s current involvement in supporting railway reforms in Bulgaria was not decided lightly. The World Bank had to be convinced that the Government’s plan to rescue and reform railways will ensure long-term survival of the sector.

Before the World Bank responded favorably to support the Government Railway Reform Program, the World Bank reviewed the Government’s reform action plans that were started in 2009 and 2010 and Government’s intentions for future years, including their compatibility with Bulgaria’s fiscal policies and with European Union’s policies. The World Bank then concluded that they could form a basis for its support to the Government.

Ongoing discussions with the Government envisage World Bank support through a Specific Investment Loan to NRIC of about EUR 70 million to modernize its maintenance practices by modernizing NRIC’s maintenance equipment, and a series of three Development Policy Loans over the period between 2011 and 2013 of about EUR 80 million each that will be disbursed only after specific agreed policy actions are implemented by the Government.

9. How different is this new program from previous World Bank work on Bulgarian railways in the past?

The previous partnership between the World Bank and Bulgaria in the railway sector took place between mid-1990s and early 2000s—through an investment project and a series of adjustment loans—that helped prepare Bulgaria for EU accession through important reforms. These reforms did not address the sector’s difficult structural issues which continue to threaten the sustainability of railways in Bulgaria. The new program is therefore a continuation of previous engagement in support of more substantial reforms championed by the government.

10. Does the World Bank insist on railway service cuts and line closures?

The Government of Bulgaria has developed and started implementing a Railway Reform Program and is working with several international partners to implement this program. The World Bank was requested to provide technical and financial support for Government policies that would put the railway sector on a sound financial footing and develop railways in Bulgaria as a viable transport option.

Railway lines in Bulgaria were built in the last century and were mostly developed and promoted during the communist era. They used to serve the planned economy. Since the collapse of communism, Bulgaria’s economy has been completely transformed, and railway business is now less than one-third of what it used to be during communism.

The needs of the Bulgarian population and economy today are very different, but railway lines have not changed, some railway passenger services are still being offered even if they are carrying fewer and fewer passengers, other trains carry less than seven passengers on average, and instead of investing in and modernizing railway lines that support the new economy and the new needs of the Bulgarian population, public money has continued to be spent on the same lines and on the same railway passenger services as in during communist times.

There are therefore legitimate questions asked by the Bulgarian population and taxpayers: why not invest the same money that is being annually poured in old unutilized or little utilized lines and services, in modernizing and upgrading the core railway lines? The answer to this question means that changes to railway lines in Bulgaria are necessary in order to develop the lines that serve a completely new Bulgarian economy, and close those that once served the planned economy and are not needed anymore.

11. Why does the reform of railways include staff reductions?

By all measures, railways in Bulgaria are overstaffed. For example railway staff productivity in Bulgaria is between 25 and 30 percent of the average productivity in the European Union.

As an illustration, there are on average 80,000 trips made on Bulgarian railways in Bulgaria every day, and railways employ about 31,000 people in 2009, when the reform started.

In 2009, in BDZ EAD, revenues from passenger tickets were around BGN 84 million and staff costs were BGN 98 million. Similarly, for NRIC, revenues from track access charges were BGN 102 million and staff costs were BGN 157 million. Staff costs that are not covered by BDZ EAD and NRIC’s own revenues are covered by money transferred from the state budget (taxpayers’ money).

The Government Railway Reform Program identifies overstaffing as a serious issue. At the same time, it recognizes that social measures such as adequate compensation, retraining, and support to find new jobs must be put in place to accompany those staff that might lose their jobs due to the reform program.

12. What will happen to rail workers under the railway reform program?

The reform program envisages new human resources strategies as well as training program to significantly increase the capacities of railway staff. In addition, the proposed EUR 70 million World Bank Specific Investment Loan to NRIC exclusively finances railway maintenance equipment and machinery that will significantly improve the working conditions of railway maintenance staff and modernize NRIC. Currently, NRIC’s maintenance practices rely on a lot of manual labor under very difficult conditions and requires a lot of walking, and thanks to the World Bank supported investment in maintenance equipment, these working condition will significantly improve.

On the other hand, railway reform will likely have social impacts on railway staff to be reduced. The Government is currently preparing in consultation with the unions an action plan to draw upon available Bulgarian social protection programs to assist these staff. This plan should include: facilitating access to relevant training and job placement services, clarifying issues of eligibility for the companies and individual staff to all relevant government programs, and clarifying continuity of access to key services such as housing or medical benefits for affected personnel.

13. Will railways in Bulgaria be privatized?

There are already several private freight operators in Bulgaria, such as Bulgarian Railway Company (BRC) and Bulmarket. Private railway operators have been aggressively competing with the BDZ Freight EOOD.

Many analyses show that the profitable freight business in Bulgaria has been gradually taken over by private freight operators and BDZ Freight EOOD has been left with less and less profitable business.

Similar observations have been registered in neighboring EU countries.

Analyses show that the key reason for the lack of competitiveness of BDZ Freight EOOD is poor commercial management and lack of business orientation under state control. Despite being a company, BDZ Freight EOOD has not been able to modernize its management culture as a commercial entity and has continued to be run as a government department.

If BDZ Freight EOOD is not given the chance to compete freely in the very competitive freight market in Bulgaria, it may end up with the least profitable business and given its very high cost structure and obsolete rolling stock, this would lead to its collapse.

It is therefore important to allow BDZ Freight EOOD to be run as a private entity free of government and bureaucratic control.

It is important that any decision be conducted after a thorough due diligence and in a transparent manner.

14. I take the train every weekend to visit my family, how will the cost reductions affect me and my family? Should people from remote areas suffer from this?

Reforming railways might require service reduction or line closures. This will affect lines that are not utilized now or some lines that have very low patronage (some trains currently run almost empty, and on some lines there are on average seven passengers per train). The number of passengers that might be impacted is not expected to be large. In any case, any suspension of railway services will ensure that alternative transport services, like buses and vans are in operation or put in place. People in remote areas will have the same or better level of transport services, although they may not be by train.

15. If rail service is replaced by bus, will it pollute more?

Several studies conducted in Europe show that when a railway line receives less than 20 (passenger) trains per day with EU average occupancy rate on the regional network (25% of occupancy per train), it is preferable to close this line and replace it by an alternate autobus liaison service–this will pollute less both in terms of Green House Gases and Carbone Dioxide (CO2). As studies have been conducted in countries with average EU carbon intensity for electricity provision (344 gCO2/kWh in 2005), i.e. with a much better carbon intensity than the Bulgarian level (more than 1,000 gCO2/kWh), these results are likely to be more than applicable to the current reform program.

16. How many kilometers of rail lines are likely to be closed?

Several studies have shown that a large share of the 4,150 km of railway lines in Bulgaria can be considered as economical and necessary for Bulgaria, the remainder being a legacy of the planned economy.

The decisions for line closures will be taken after serious consideration by the Government, taking into consideration different factors such as productivity, percentage of occupancy per train/line, and others. Once decided by the Government, line closure may take several years to implement.

Some estimates show however that about 530 km of lines could be suspended for operations and dismantled between 2011 and 2013 with very minimal impacts on people’s transport needs, and with significant positive impacts on the level of taxpayers’ contribution to sustain these unutilized or little utilized lines.

17. Will railway reform impact railway safety?

Putting railways in Bulgaria back on sound financial footing cannot be at the price of railway safety. There are strict rules and regulations for railway safety in Bulgaria that are fully consistent with EU requirements.

Key to railway safety is ensuring that railway infrastructure and rolling stock are maintained in good working condition, that train speeds and operations are kept at a level that is consistent with the technical condition of the railway infrastructure and rolling stock as per the legal requirements, and that safety inspections and audits are regularly conducted.

At the operational level, safety is a shared responsibly between railway management and operational staff.

On the investment side, ongoing and planned investments under EU programs should greatly enhance safety on Bulgaria’s railway network.

In parallel, the proposed EUR 70 million World Bank Specific Investment Loan to NRIC exclusively finances the complete modernization of NRIC’s maintenance equipment and machinery. The investment in this equipment under World Bank loan will significantly increase the safety on Bulgaria’s rail network. The equipment will be purchased between 2011 and 2014, and they will include inspection machines and track and catenary maintenance machines.

18. Is it true that World Bank loans will be used to pay off old railway sector debts?

The World Bank Specific Investment Loan to NRIC (EUR 70 million) will be used to completely modernize NRIC’s maintenance equipment over the period between 2011 and 2014. The purchase of the equipment follows strict procurement rules, and the use of loan proceeds is subject to annual independent audits, which is a practice for all World Bank loans.

The series of three World Bank Development Policy Loans (EUR 80 million each) are to support the Government’s budget against the implementation of agreed prior policy actions. They are directly disbursed in the government budget after the World Bank has received satisfactory evidence that the policy actions have been implemented. The funds from these loans are not ear-marked to any specific government expenditure. In case prior actions are not implemented, the loans are not approved and they do not disburse.

Under the railway reform program developed by the government, it is envisaged that the rescue plan for BDZ EAD may include restructuring of BDZ EAD’s debt. The terms of this restructuring is not determined yet. However, it is certain that the loans from the World Bank are not ear-marked to pay off or restructure any existing debt.

About the reform program

The Government of Bulgaria recognizes the importance of a strong railway sector to the economy of Bulgaria. It has developed and started implementing a Railway Reform Program to achieve its ambitious vision to transform the railway sector in Bulgaria into a vibrant industry. It is a tough reform program that combines strategic investments with deep restructuring of the industry:

The Government has pushed to start long-delayed EU-funded infrastructure investments along European Corridors.

The Government has provided about BGN 400 million every year to BDZ EAD and NRIC to pay for public services and investments in railway.

The Government and NRIC have initiated investments in the modernization of NRIC’s maintenance equipment to enhance the safety of railway operations, and the working conditions of NRIC maintenance workers.

The Government has approved bridge financing to BDZ EAD to help it through its financial crisis.

The Government has requested EC approval of state aid to rescue BDZ EAD.

The Government has started working on a program to make the contracts between the state, BDZ EAD, and NRIC work better.

§ Both BDZ EAD and NRIC have prepared and started implementing business restructuring plans in 2009 and 2010 to improve their operations and provide better value for the money they receive from taxpayers. These plans include:

- Optimization of business units and staff, and reduction in costs

- Disposal of businesses that are not related to railways

- Suspension of operations on railway lines that do not have any traffic, but have costs

- Appointments of qualified, competent staff and management who are accountable to citizens

- Training of railway managers and workers

To help railway staff affected by the Railway Reform Program, Government is a supplementing the severance paid by railways with a program of social protections and transition assistance.

The Government of Bulgaria is working with international partners to implement its Railway Reform Program.

Requested the European Commission (EC) and international financial institutions (EIB, EBRD, IBRD) to help the Government to use more EU funds for railway investments.

Requested the European Commission’s approval for the Government’s proposed state aid to rescue BDZ EAD.

Requested the World Bank’s technical support for the implementation of the policy and institutional actions, in the light of World Bank’s global experience in railways reforms.

Requested World Bank financing of investments for NRIC that focus on safety maintenance equipment, which complement EU financed investments.

Memorandum of Understanding

On December 15, 2010, the Government of Bulgaria signed a Memorandum of Understanding (MoU) with The World Bank aimed at providing support to the country’s railway sector.

The Bulgarian State Railways (BDZ) is a 100-percent state-owned railway operator for passengers (100 percent of market) and freight (about 80 percent of freight). Several private freight companies capture about 20 percent of the railway freight market. Regulation and safety are managed by the Railway Administration Executive Agency. Passenger services are provided by BDZ user a contract (PSC) with the MOT.

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